Income Taxes

12 Months Ended

Dec. 31, 2019

The Tax Cuts and Jobs Act of 2017 (the Tax Act), enacted on December 22, 2017, made broad and complex changes to the U.S. federal corporate income tax rules. Most notably, effective January 1, 2018, the Tax Act reduced the U.S. federal statutory corporate income tax rate from 35 percent to 21 percent, introduced a territorial tax system in which future dividends paid from earnings outside the United States to a U.S. corporation are not subject to U.S. federal taxation and imposed new U.S. federal corporate income taxes on certain foreign operations.

The results of operations of Credco are included in the consolidated U.S. federal income tax return of American Express. Under an agreement with American Express, provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits

are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on an American Express consolidated reporting basis.

The components of income tax expense for the years ended December 31 included in Credco’s Consolidated Statements of Income were as follows:


(Millions)	2019		2018		2017
Current income tax expense (benefit):
U.S. federal	$	45	$	(14)	$	785
U.S. state and local	13		(6)		15
Non-U.S.	23		84		24
Total current income tax expense	81		64		824
Deferred income tax expense (benefit):
U.S. federal	11		(28)		58
U.S. state and local	—		1		1
Non-U.S.	2		(8)		(5)
Total deferred income tax expense (benefit)	13		(35)		54
Total income tax expense	$	94	$	29	$	878

A reconciliation of the U.S. federal statutory rate of 21 percent as of both December 31, 2019, and 2018, and 35 percent as of December 31, 2017, to Credco’s actual income tax rate on continuing operations was as follows:


	2019		2018		2017
U.S. statutory federal income tax rate	21.0	%	21.0	%	35.0	%
Increase (decrease) in taxes resulting from:
State and local income taxes, net of federal benefit	0.8		(0.4)		(0.3)
Non-U.S. subsidiaries earnings^(a)	(3.7)		(8.7)		(25.7)
Tax settlements^(b)	—		—		(1.1)
U.S. Tax Act^(c)	—		(5.6)		311.6
Other^(d)	0.3		0.7		(0.2)
Actual tax rate	18.4	%	7.0	%	319.3	%

(a)2017 primarily included tax benefits associated with the undistributed earnings of certain non-U.S. subsidiaries that were deemed to be reinvested indefinitely.

(b)Related to the resolution of tax matters in various jurisdictions.

(d)Results for all years include the impact of prior year tax returns filed in the current year.

Credco records a deferred income tax (benefit) provision when there are differences between assets and liabilities measured for financial reporting and for income tax return purposes. These temporary differences result in taxable or deductible amounts in future years and are measured using the tax rates and laws that will be in effect when such differences are expected to reverse.

The significant components of deferred tax assets and liabilities as of December 31 are reflected in the following table:


(Millions)	2019		2018
Deferred tax assets:
Reserves not yet deducted for tax purposes	$	29	$	36
State income taxes	9		7
Foreign exchange loss	32		42
Other	25		29
Gross deferred tax assets	95		114
Deferred tax liabilities:
Investment in foreign subsidiaries^(a)	74		77
Gross deferred tax liabilities	74		77
Net deferred tax assets	$	21	$	37

(a)Deferred state income and foreign withholding tax consequences of future cash distributions from non-U.S. subsidiaries.

Credco is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which American Express operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. Given these inherent complexities, Credco must make judgments in assessing the likelihood that a tax position will be sustained upon examination by the taxing authorities based on the technical merits of the tax position. A tax position is recognized only when, based on management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of benefit recognized for financial reporting purposes is based on management’s best judgment of the largest amount of benefit that is more likely than not to be realized on ultimate settlement with the taxing authority given the facts, circumstances and information available at the reporting date. Credco adjusts the level of unrecognized tax benefits when there is new information available to assess the likelihood of the outcome.

Credco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which it has significant business operations. The tax years under examination and open for examination vary by jurisdiction. Tax years from 2016 onwards are open for examination by the IRS.

The following table presents changes in unrecognized tax benefits:


(Millions)	2019		2018		2017
Balance, January 1	$	73	$	24	$	308
Increases:
Current year tax positions	5		4		8
Tax positions related to prior years	4		46		—
Decreases:
Tax positions related to prior years^(a)	—		—		(289)
Lapse of statute of limitations	(2)		(1)		(3)
Balance, December 31	$	80	$	73	$	24

(a)Decrease due to the resolution with the IRS of an uncertain tax position in January 2017, which resulted in the recognition of $289 million in shareholder’s equity, specifically within AOCI.

Included in the unrecognized tax benefits of $80 million, $73 million and $24 million for December 31, 2019, 2018 and 2017, respectively, are approximately $57 million, $52 million and $19 million, respectively, that if recognized, would favorably affect the effective tax rate in a future period.

Credco believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $4 million principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $4 million of unrecognized tax benefits, approximately $3 million relates to amounts that, if recognized, would impact the effective tax rate in a future period.

Interest and penalties relating to unrecognized tax benefits are reported in the income tax provision. For the year ended December 31, 2019 Credco recognized a tax charge of $3 million for interest and penalties. For the year ended December 31, 2018, Credco recognized an immaterial amount for interest and penalties. For the year ended December 31, 2017, Credco recognized tax benefits of approximately $1 million for interest and penalties. Credco had approximately $8 million and $5 million accrued for the payment of interest and penalties as of December 31, 2019 and 2018, respectively.

Current taxes due to American Express or affiliates as of December 31, 2019 and 2018 were $431 million and $727 million, respectively. The amount due to American Express for 2019 includes a $441 million payable related to the one time transition tax on the repatriated earnings and profits of certain foreign subsidiaries under the Tax Act.


	Payments due by year
(Millions)	2020		2021 - 2022		2023 – 2024		2025 and thereafter		Total
Deemed repatriation tax^(a)	$	—	$	—	$	115	$	326	$	441

(a)In 2019, the IRS applied the prior year U.S. federal income tax return overpayment against a portion of the remaining obligation.

Net income taxes paid by Credco during 2019 and 2018 were approximately $359 million and $144 million, respectively.